Aditya Birla Fashion & Retail Ltd. -Quarterly results update

Weak demand dynamics continue to weigh on margins

ABFRL reported a 11.2% YoY growth to Rs. 3,196.1 crores in Q1FY24, exceeding market expectations of Rs. 3,188.6 crores on the back of its Madura portfolio. The GP Margins declined 101bps QoQ / 109bps YoY to 54.8% due to higher yarn prices and weak demand dynamics. The EBITDA declined 37.6% YoY to Rs. 292.3 crores in Q1FY24, significantly below market expectations of Rs. 325.4 crores. The EBITDA margins contracted to 9.2% in Q1FY24 compared to 16.3% in Q1FY23. This was on the back of low retail throughput due to subdued demand, higher fixed costs along with investment in subsidiaries – TMRW. Consequently, the PAT sunk to a net loss of Rs. 161.6 crores in Q1FY24 compared to Rs. 94.4 crores profit in Q1FY23, higher than market estimates of Rs. 129.2 crores loss. The company added 28 new brand stores in its network and 3 Pantaloon stores in the quarter. The company’s board of directors approved to incorporate a new company in partnership with Christian Louboutin SAS (“CL”) and invest up to Rs. 10 crores in the same.

Key Concall Highlights

• The company’s consolidated EBITDA margin deteriorated due to subdued sales in Q1FY24, higher marketing costs and fixed costs, and aggressive growth investments in the TMRW subsidiary.
• Lifestyle brands recorded a 5% YoY revenue growth while its EBITDA margin stood at 18.3% (up 80 bps YoY) in Q1FY24 owing to cost reduction initiatives in its other expenses. The company recorded a strong pickup in its wholesale business with growth in department and trade store business while retail stores recorded a -2% LTL growth.
•  The company’s Western Fashion brands (American Eagle and Forever 21) added 3 new stores in its network, taking its reach to 40 EBOs and 65+ departmental stores.
• Reebok reported a 43% YoY growth on the back of 12% LTL growth and added 10 new stores in thequarter. Currently, the brand is at a break-even level but expects to generate profit by the end of theyear.
• Pantaloons recorded a 1% YoY growth, with a -8% retail LTL growth. The segment added 3 newstores in the quarter, taking the total store count to 434 stores. Overall, weak demand dynamics andan uptick in yarn prices impacted the business performance of this segment. The business expectsstabilization in yarn prices which will thus lead to correction in its private label prices.
•  Ethnic brands portfolio reported a 33% YoY sales growth and the company added 12 new stores in the quarter. However, margins got impacted due to the one-time large marketing cost with the launch  of the Sabyasachi store in Mumbai and the aggressive growth strategy for Tasva. The company plans to add 40 new Tasva stores in the fiscal year.
•  The business expects TMRW to report a loss in the range of Rs. 80-100 crores in FY24.
•  As of 31st June,2023, the net debt of the company stood at Rs. 21 billion which is expected to inchupwards to around Rs. 28 billion by the end of FY24.

Valuation and Outlook

Despite a weak demand scenario in the value segment of the apparel industry, ABFRL clocked in a decent 11.2% YoY revenue growth in the quarter. The business slashed its Pantaloons segment store additions guidance to 35-40 stores compared to around 60 new store additions last fiscal, reflecting the soft consumption trend in the segment. This can be further evidenced by the segment reporting a negative LTL growth of 8% and revenue growth of 1% compared to the corresponding quarter of last year. Along with this, the margin profile of the business continues to remain a cause of concern after the shift in consumption trends post-Diwali impacted the growth trajectory of the business. The Ethnic brand portfolio and the Innerwear & athleisure business underperformed the market expectations as fewer wedding dates in the quarter and a slowdown in the innerwear segment impacted the growth trajectory of these segments. Additionally, the business expects its inventory levels and debt to remain on the higher side as it steps up its investments in its subsidiaries which further constrains the financial health of the business going forward. However, the management has indicated recovery from H2FY24 onwards. Thus, we remain focused on the performance of its ethnic brands in the coming quartersand continue to keep track of Pantaloons-related updates.